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Projected Spending and Revenues in Historical Context

As I mentioned in an earlier blog post, we think that some of our answers to follow-up questions from Congressional hearings may be of general interest, so we’re posting them.

Following a recent hearing, we were asked by a Member of Congress: “Based on historical trends of revenue and spending, is the primary driver of deficits over the next ten years historically high spending?” Here was our answer:

Under current law, deficits during the 2014–2023 projection period will average 3.3 percent of GDP, CBO projects, similar to the 40-year average of 3.1 percent. In those projections, the deficit initially declines from 5.3 percent this year to a low of 2.4 percent in 2015 and follows an upward trend thereafter, reaching 3.8 percent by the end of the projection period.

CBO projects that revenues will average about 19 percent of GDP during the coming decade under current law, above their 18 percent average of the past 40 years. CBO also projects that outlays will average 22 percent of GDP over the next 10 years under current law, above their 21 percent average of the past 40 years. Thus, both outlays and revenues are projected to be higher than their historical average shares of the economy’s total output.

CBO expects that, under current law, outlays will be above their historical average primarily because the aging of the population, rising health care costs, and a significant expansion in eligibility for federal subsidies for health insurance will push up spending for Social Security and the major federal health care programs (Medicare, Medicaid, and the subsidies to be provided through insurance exchanges). Such spending is projected to equal 10.9 percent of GDP during the coming decade, compared with a 40-year average of 7.2 percent. In addition, with federal debt held by the public much larger relative to GDP than it has been in the past, net interest payments are projected to equal 2.5 percent of GDP, compared with a 40-year average of 2.2 percent.

Other broad categories of spending are expected to represent smaller shares of GDP than they have been in the past: Mandatory spending other than for Social Security and the major health care programs is projected to average 2.6 percent of GDP, compared with a 40-year average of 3.0 percent; defense spending is projected to average 3.0 percent of GDP, compared with a 40-year average of 4.7 percent; and nondefense discretionary spending is projected to average 3.0 percent of GDP, compared with a 40-year average of 4.0 percent.